Emergency Funds: Your Financial Safety Net
Whether you have a sudden loss of income or a big, unplanned expense, an emergency fund can help limit damage to your finances. Learn what an emergency fund is, why you need one and how much you should save.
If you don't have an emergency fund, you're not alone. Savings that rose steadily between 2013 and 2021 have reversed since 2022.
A 2023 Federal Reserve report found that only 63% of adults said they could cover a $400 expense exclusively using cash, savings or a credit card they could pay off at the next statement.
What Is An Emergency Fund?
An emergency fund is money you set aside to cover big, unexpected expenses or a sudden loss of income. It's usually kept liquid, or easily accessible in a savings account.
The 2023 Federal Reserve report noted that just 54% of adults set aside money for three months of expenses in an emergency savings or "rainy day" fund. Around 30% of respondents said they couldn't cover three months of expenses in any way.
Why Do I Need an Emergency Fund?
Emergency funds help you avoid paying for unexpected expenses with other means, some of which might cost more because of interest or might damage your credit. In the 2023 report, 37% of survey respondents said they would be forced to cover the $400 by relying on credit cards, bank loans, payday loans, borrowing from friends and family, selling something or not paying the expense.
So, an emergency fund is beneficial if you are working to reduce your debt. One of the best ways to get out of debt is to prevent adding to it.
Emergency Fund Uses
- Car repairs: An accident could leave you with costly repairs, paying a deductible or replacing your car entirely.
- Household expenses: Your dishwasher (or roof) springs a leak that requires professional help.
- Last-minute travel: A friend or family member gets sick unexpectedly, and you must book a last-minute flight.
- Natural disasters: Around 13% of adults experienced natural disaster-related disruptions in the previous 12 months — including property damage and temporary evacuation.
- Medical emergencies: The 2023 report noted that almost one-quarter of U.S. adults had major, unexpected medical expenses in the prior 12 months. The average amount was between $1,000 and $1,999.
- Job loss or work reduction: That mandatory work meeting reveals the company is downsizing, your hours were reduced or you've been laid off.
How Much Should I Save for an Emergency Fund?
Remember, emergency funds aren't one-size-fits-all. There is no magic number that works for everyone.
A good rule of thumb is to save enough to cover three to six months of essential expenses if you lose your job or can't work for several months.
Calculate Your Monthly Expenses
To figure out how much to save, track your monthly expenses for a month and note which are must-haves and nice-to-haves.
Must-have expenses, or essentials, include housing (rent or mortgage payments), utilities, childcare, car payments and food. Add up a month's worth of essentials and multiply by three to calculate your three-month savings goal.
For example, the average monthly expenses for a single household in 2022 were $3,693, according to the U.S. Bureau of Labor Statistics. So, in that case, you'd want to multiply $3,693 by three and put aside $11,079 in your emergency fund.
For more cushion, multiply your monthly essential expenses by six to see your six-month savings goal.
6 Tips To Save for an Emergency Fund
Don't panic if saving six months' worth of expenses seems impossible. The important thing is that you start. Here are some tips:
- Set your savings goal: Saving for emergencies is like saving for anything else: You need to know your target amount. If the total is overwhelming, start with a micro-goal: Save $100 first, then another $100. Emergency funds don't grow overnight, but as long as they grow, that's all that matters.
- Commit to a specific amount: Look at your income and expenses and see how much you can dedicate to savings. If your expenses exceed your income, you'll need to re-examine your budget and either reduce your spending or increase your income so you can save money each month, even if it's a small amount.
- Set up automatic savings: Once you know the exact amount you can commit to saving regularly, consider setting up an automatic savings plan that transfers a fixed amount to savings according to intervals you specify (monthly, weekly or every two weeks, for example).
- Build with bonuses: Any surprise or annual bonus bucks you receive from birthdays, job bonuses or tax refunds can be an easy way to add to your emergency fund.
- Continue paying off debt: It can be tricky to balance saving and paying down debt at the same time, but paying off debt saves you money on interest and fees. Find a debt repayment method that works for you and leaves room in your budget to save for a rainy day — even if it's just a few dollars a month.
- Don't raid your savings fund. Using the money in your emergency savings for a vacation, funding a special event or other financial resolutions could be tempting. Create a list of acceptable expenses and stick to them.
Where Should I Stash My Emergency Fund?
While some may think it's best to stash cash somewhere in the house, remember that this money can be stolen or lost. Banks and credit unions offer insured accounts with security features to help protect your money. Once you figure out how much to save and how to save it, it's important to think about the account type you will use.
Make sure your emergency fund has these features:
Save To a Separate Account
Put your money in an account that's separate from your regular checking and savings accounts (the accounts you use for routine spending). That way, you aren't tempted to spend your emergency funds on everyday purchases. You can also try digital options to create separate fund categories without opening separate accounts. BECU offers members the digital tool, Envelopes, for example.
Make Sure Your Account Is Insured
Check with your financial institution to be sure your money is protected. For example, BECU accounts are federally insured by the National Credit Union Association (NCUA) up to $250,000 combined, per individual account holder.
Use an Account That Allows Withdrawals
Make sure you can get to your money when you need it. A traditional savings account might be your best option. Although a certificate of deposit (CD) might be tempting because of higher interest rates, you'll usually pay a penalty if you withdraw money from a CD early.
Bottom Line: Is an Emergency Fund Worth It?
Without extra funds, a financial change — even minor — has the potential to set you back. If you rely on credit cards or loans, you could end up increasing your debt or damaging your credit. The habit of building your emergency fund may be hard to start, but when that rainy day arrives, and you're faced with an occasion to use it, you'll be glad you saved.